WACC Calculation Comments and Responses to the Public Hearing Agency for Electronic Communications

23 March 2010

Table of Contents

1 2

Introduction ....................................................................................................... 2 Comments from Makedonski Telekom ........................................................... 4 2.1 General Comments on the Calculation ....................................................... 4 2.2 Risk-free Rate ............................................................................................ 5 2.3 Beta Coefficient .......................................................................................... 6 2.4 Equity Risk Premium .................................................................................. 8 2.5 Cost of Debt ............................................................................................... 9 2.6 Financial Gearing ..................................................................................... 10

Comments from T-Mobile Macedonia ........................................................... 12 3.1 Beta Coefficient ........................................................................................ 12 3.2 Financial Gearing ..................................................................................... 14

4 5

WACC for Fixed Line Operators in Macedonia ............................................ 15 WACC for Mobile Operators in Macedonia ................................................... 16

WACC Calculation Comments and Responses to the Public Hearing

1 Introduction

Agency for Electronic Communication of the Republic of Macedonia (AEC) hired Deloitte Advisory and Management Consulting PLC from Hungary (Deloitte) to calculate the cost of capital for fixed line and mobile operators in Macedonia, in connection with the determination of the appropriate rate of return on capital employed for operators with significant market power in Macedonia. For the purpose of this engagement, cost of capital was defined as the weighted average cost of capital (WACC) on a nominal, pre-tax basis. In accordance with the terms of the engagement, Deloitte performed the calculation of the weighted average cost of capital for both fixed line and mobile operators with significant market power in Macedonia, as of 30 September 2009. As of the calculation date, Makedonski Telekom a.d. was the only fixed line operator with significant market power in Macedonia, in accordance with the criteria defined by the AEC. On the other hand, also based on the AECs criteria, T-Mobile and One are the only mobile operators with significant market power in Macedonia. As a result of the calculation, Deloitte provided the AEC with two separate preliminary draft reports with the details on the methodology and the results of the WACC calculation for fixed line and mobile operators in Macedonia. Furthermore, in accordance with the procedures, AEC published the preliminary draft reports on its website and provided the operators with an option to review the calculation and provide their comments. Accordingly, Makedonski Telekom a.d. Skopje provided the AEC and Deloitte with the written comments on the calculation of the weighted average cost of capital for fixed line operators in Macedonia. T-Mobile Macedonia also provided the AEC and Deloitte with the written comments on the calculation of the weighted average cost of capital for mobile operators in Macedonia, whereas One did not provide any written comments. In addition to the written comments provided, the operators were provided with the opportunity to discuss the preliminary draft reports findings during a public hearing meeting held on 11 February 2010, at the AECs premises in Skopje, Macedonia. The representatives of AEC supported by Deloitte representatives managed this public hearing meeting. Following are the major comments made by Makedonski Telekom and T-Mobile on the WACC calculation, and corresponding responses prepared AEC with the support of Deloitte consultants. WACC Calculation Comments and Responses to the Public Hearing

Makedonski Telekom and T-Mobile are part of the same telecom group and have, hence, provided identical comments on certain elements of the WACC formula that are the same in both the fixed line and mobile WACC calculation. These elements are: risk free rate, equity risk premium and cost of debt. Therefore, AEC addressed the comments on these elements only once, while the comments unique to the fixed line and mobile WACC calculation were addressed in the separate sections of this document. Finally, as a result of the comments provided and the corresponding responses, AEC with assistance of Deloitte implemented the changes to the initial calculation of WACC, for both fixed line and mobile operators, and presented the new results at the end of this document.

WACC Calculation Comments and Responses to the Public Hearing

2 Comments from Makedonski Telekom

2.1

General Comments on the Calculation

General comment of Makedonski Telekom (MKT) on the calculation of the weighted average cost of capital (WACC) for fixed line operators in Macedonia is that the calculation did not follow international best practice or European standards. In addition, Makedonski Telekom is of the belief that the calculation presented in the preliminary draft report was not detailed enough. Also, since the Makedonski Telekom is currently the only fixed line operator in Macedonia, Makedonski Telekom argues that the WACC should be calculated according to the specific characteristics of this operator and not on an efficient operator basis, as proposed by the preliminary draft report. WACC for fixed line operators in Macedonia was estimated in accordance with the guidelines provided by the Independent Regulators Group (IRG) and the specific risk characteristics unique to the Republic of Macedonia and the telecom operators doing business on this market. Additionally, the calculation in Macedonia is in line with the approaches and methodology utilized in the calculation of WACC in the region. The calculation of WACC for fixed line operators in Macedonia was based on an efficient operator assumption in order to be in line with the LRIC model currently under development by the Agency for Electronic Communications (AEC). Since this LRIC model will be developed for an operator that is considered to be market efficient, appropriate WACC to be applied on such a base should also be on a market efficient principles. For the purpose of the WACC calculation, the concept of efficient market operator does not have a precise definition. Independent Regulators Group suggests that National Regulatory Authorities (NRA) should define what an efficient market operator on their market is and calculate the WACC accordingly. In doing so, IRG suggest that NRAs may rely on proxies, benchmarks and peer groups. In case of fixed line operators in Macedonia, AEC and Deloitte believe that a sample of selected fixed line operators from Europe can serve as a good peer group for determining the characteristics of an efficient market operator. The sample of peer operators has been limited to only EU-based operators, since they have established and stable networks. Basically, the main assumption is that on average

WACC Calculation Comments and Responses to the Public Hearing

EU-based fixed line operators are efficient. Accordingly, presented WACC calculation does not account for any operator specific circumstances that Makedonski Telekom suggests, such as beta coefficient, cost of debt and/or capital structure. Based on the information available to AEC and Deloitte, there are only a few examples in which NRAs in Europe included operator specific factors in the WACC calculation for either fixed line or mobile operators.

2.2

Risk-free Rate

Makedonski Telekom believes that the approach used in calculating the risk-free rate in Macedonia is not appropriate for the WACC calculation of Macedonian operators. Specifically, Macedonia is not a member of European Union and the risk free rate in Macedonia and in EU countries is significantly different. They propose to estimate the risk free rate based on the historical average method on recent available data. To smooth out the short term fluctuation and reflect a forward looking trend, Makedonski Telekom, believes that the calculation of a forward looking risk free rate should be carried out based on a moving average of nominal 10year Macedonian government bond. The risk-free rate in Macedonia was calculated based on the international investors perspective and the premise that the real risk-free rates should be the same in all countries, regardless of the membership in EU or the relative size of the economy. Hence, the calculation relies on the nominal yields to maturity on 10-year government bonds of EU member countries, as of the end of September, adjusted for inflation expectations. Selection of countries was based on the availability of 10-year government bonds in EU as of the assessment date. Since there is a significant difference in the volume of the observed issues, a weighted average risk-free rate from the sample was used, whereas the expected nominal GDPs in corresponding countries for 2009 were used as weights. AEC and Deloitte believe that it is not appropriate to use yield to maturity on the Macedonian 10-year Government bond for several reasons. Specifically, since these bonds were issued as Eurobonds, their yields represent EUR-denominated rate of return, which is not appropriate risk-free rate proxy for the purpose of this calculation. Also, based on the historical trading information, market for these bonds is not liquid enough and, hence, yields on these bonds include a liquidity premium. Hence, AEC and Deloitte believe that mobile and fixed line operators in Macedonia should not be entitled to a premium for the risk they do not bear, i.e. liquidity risk. Preliminary draft reports have also considered specific risk factors related to investing in Macedonia and the corresponding premium. This premium should compensate investors for the specific countryrelated risk that they expose themselves to, by making equity/ fixed income investment in Macedonia. However, this risk premium was added as a separate element in the CAPM equation. WACC Calculation Comments and Responses to the Public Hearing 5

Finally, the original assessment of the risk-free rate in Macedonia equal to 4.49% will be retained.

2.3

Beta Coefficient

Makedonski Telekom stated that the best approach to estimate the beta coefficient is to use the historical approach by comparing the co-movement between a company and the market. This method is possible for Makedonski Telekom (sticker: MKT) since MKT is listed on Skopje Stock Exchange. Further, Makedonski Telekom stated that presented approach implies that beta measures the branch-specific risk of fixed line telecommunications in Europe rather than the company-specific risk of Makedonski Telekom. According to Makedonski Telekom the applied approach mismatched the purpose of the beta by estimating the risk for the entire fixed line telecommunication market in Europe. The selection of the peer operators presented in the preliminary draft report is not consistent to the peer group for the calculation of the risk free rate. Furthermore, Makedonski Telekom claims that no rationale is given for the selected peer operators and that most of the peer group operators do not reflect the circumstances of the Macedonian fixed line operator. Finally Makedonski Telekom claims that the level of unlevered beta coefficients vary significantly and are rather low compared to the results of beta calculations of other regulators. Makedonski Telekom calculated beta coefficient of 1.1, based on the regression of returns on MKT stock and MBID index. The beta coefficient calculated in the preliminary draft report for fixed line operators in Macedonia was based on the unlevered beta coefficient from the selected peer group and the capital structure considered as optimal. This procedure is in line with the main premise that WACC should be calculated on an efficient market operator basis. If this premise is adopted, all WACC elements should be calculated accordingly and no operator-specific factors should be considered in the calculation. This calculation premise is particularly important when the underlying principle of LRIC model is also based on efficient market operator principles. AEC and Deloitte disagree with Makedosnski Telekom that the approach utilized in the calculation determines branch-specific risk for fixed line telecommunications in Europe. This approach is based on un-levering raw beta coefficients from the market, in an attempt to determine the true business exposure of operators to the market fluctuations. Afterwards, this systematic risk measure is relevered with the capital structure that is considered as an optimal structure for a fixed line operator, in order to arrive at an estimate of equity beta coefficient for an efficient market operator. This beta coefficient is not a risk measure of the entire fixed line telecommunication market in Europe, as stated by Makedosnski Telekom, but rather an estimate of what would be a beta coefficient for a fixed line operator that is considered market efficient.

WACC Calculation Comments and Responses to the Public Hearing

Furthermore, there is no inconsistency between the peer groups used in the calculation of risk-free rate and the beta coefficient. AEC and Deloitte acknowledge the fact that countries represented in these two samples are not completely identical. Makedonski Telekom should note the fact that both samples include only EU-member countries as EU market is considered as an integrated market with free flow of capital, including equity and fixed income investments among other, and no barriers between member countries. Sample used for the calculation of the beta coefficient was determined based on the revenue criteria. More precisely, companies included in the peer group all have the majority of revenues generated by fixed line telephony services. AEC and Deloitte acknowledge the argument that 3U Holding, a German based operator, is mainly call by call operator without the infrastructure and has thus decided to exclude this operator from the sample. Netia, a Polish based operator, was also excluded due to lack of financial information to determine the gearing for Netia. Similarly, for Cypriot based Primetel PLC, no sufficient data on beta coefficient was available and, thus, this operator is also excluded from the peer group sample. After carefully analysis of revenue generated by fixed line and mobile operations, Portugal Telecom was excluded from the fixed line sample and added to the mobile sample, which is in line with the business characteristics of this operator However, eight new peer operators have been added in the sample for fixed line operators in order to further improve the reliability of the figures computed from this sample. New operators added are: Magyar Telekom, Hellenic Telecom, Teliasonera AB, Telefonica SA, Telecom Italia SpA, Belgacom SA, France Telecom SA and Telekom Slovenije. AEC and Deloitte do not consider the approach that Makedosnski Telekom proposes is able to yield a reliable estimate of beta coefficient for several reasons, such as: (a) a sample of 12 monthly returns cannot be considered sufficient to compute beta coefficient, (b) MBID is a price index, not weighted index these kind of indexes are not appropriate to be used to compute beta coefficient, especially in low liquid markets that have shares that are not traded at all, (c) in the period observed by Makedosnski Telekom there were 25 days without any trading of MKT stocks and average daily trade was only cca EUR 7,500, (e) free float of MKT stocks is less than 5%. After considering the comments provided by Makedosnski Telekom, AEC and Deloitte consider that the general approach in calculating beta coefficient for fixed line operators in Macedonia should be as initially suggested, i.e. calculated based on the efficient market operator premise and peer group analysis. However, the arguments of Makedosnski Telekom for excluding 3U Holding, Netia and Primetel have been accepted.

WACC Calculation Comments and Responses to the Public Hearing

The new sample and the calculated un-levered beta coefficient for a fixed line operator are presented in the table that follows.
Comparable Company BT Group PLC Teo LT Tiscali SpA Telefonica O2 Czech Republic Telekomunikacja Polska SA Magyar Telekom Telecommunica Hellenic Telecommun Organiza Teliasonera AB Telefonica SA Telecom Italia SpA Belgacom SA France Telecom SA Telekom Slovenije Average Median Max Min Ticker BT/A LN TEO1L LH TIS IM SPTT CP TPS PW MTEL HB HTO GA TLSN SS TEF SM TIT IM BELG BB FTE FP TLSG SV Country Britain Lithuania Italy Czech Poland Hungary Greece Sweden Spain Italy Belgium France Slovenia 3 Years Unlevered Raw Beta Beta 0.768 0.371 0.805 0.802 1.169 0.323 0.479 0.471 0.527 0.527 0.721 0.533 0.566 0.329 0.700 0.552 0.807 0.556 0.858 0.376 0.349 0.290 0.511 0.327 0.894 0.606 0.688 0.710 1.169 0.349 0.466 0.471 0.802 0.290

Selected median un-levered beta coefficient for fixed line operators is 0.471 and the re-levered beta coefficient is 0.729. Please note that the variability of the sample of un-levered beta coefficients for fixed line operators, as measured by the standard deviation, is 14.2%. On the other hand, variability in the sample from the European Regulators Group is 14.7% and 13.4%, which cannot be considered a significant variability between samples as argued by Makedosnski Telekom.

2.4

Equity Risk Premium

Makedonski Telekom believes that there is an inconsistency between calculation of risk-free rate and equity risk premium as presented in the preliminary draft report. Furthermore, Makedosnski Telekom claims that no rationale was provided regarding the use of the US market for the calculation of the equity risk premium. Makedonski Telekom argues that the equity risk premium in Macedonia should at least be 7%, since Macedonia is not an EUmember country. In the final calculation, Makedosnski Telekom uses a equity risk premium of 8.5%. The equity risk premium was calculated based on the information from the US stock market. This equity risk premium is published in the Ibbotson Associates yearbook and used worldwide as a proxy for the expected return on the equity market over the risk-free rate. Proposed equity risk premium is

WACC Calculation Comments and Responses to the Public Hearing

equal to the average difference between returns on S&P 500 and total return on risk-free treasury securities during the period 1926 2008. Since this is a spread over a risk-free rate and not an absolute return measure, than there is no any inconsistency between the calculation of the risk-free rate and the corresponding equity risk premium. Furthermore, a document that Makedonski Telekom is referring to in their comments is from September 2008 and all the major charts in it were last time updated in January 2008. Hence, the data presented in this document is a bit outdated. However, one should note that only 3 out of 21 countries have used a higher equity risk premium for the calculation of WACC for fixed line operators than the one suggested in the preliminary draft report. On the other hand, in case of WACC for mobile operators, only one country has a higher equity risk premium used in the WACC calculation than those proposed. The comparison of equity risk premium with returns on MBI10 index is not appropriate for several reasons. The short history of stock trading in Macedonia, low market liquidity which implies higher liquidity premiums, limitations of the risk-free rate needed for equity risk premium calculation and symptoms of the early stage market growth that does not reflects long-term capital market expectations are only few to mention. Based on the above, AEC and Deloitte propose to maintain the original equity risk premium for the WACC calculation, equal to 6.5%.

2.5

Cost of Debt

Makedonski Telekom is of the belief that the approach utilized in calculating cost of debt is not in line with the international best practice. The operator argues that cost of debt should be based on the credit rating of the particular company for which the WACC is being calculated. Thus, adding a credit premium, calculated based on the synthetic rating of the observed operator, to the estimated risk-free rate should serve as a good proxy for the cost of debt for that particular operator. Since the presented approach in the calculation of WACC for both fixed and mobile operator is on the efficient market operator basis, WACC calculation should not include any specific characteristics of any particular operator doing business in Macedonia such as the synthetic credit rating of an operator as proposed by Makedonski Telekom. Also, when observed as an independent business entity, a company should not have a higher credit rating than the credit rating assigned by the rating agencies to the country in which that particular company operates. Hence, argument that Makedonski Telekom should be rated BBB+ is not in line with the current credit rating of the Republic of Macedonia, which is BB (effective from April 2009).

WACC Calculation Comments and Responses to the Public Hearing

One should note two different approaches in calculating the cost of debt were utilized. One, that is in line with the Makedonski Telekom suggestion, and the other one that is based on the spreads of yields to maturity of EU telecom bonds over corresponding yields to maturity of government bonds in countries in which these telecom bonds are located. The preliminary draft report has also examined the interest rates charged by commercial banks in Macedonia for Denar denominated loans to business enterprises. During January September 2009, the average weighted average interest rate on Denar denominated long-term loans, without a currency clause, to enterprises in Macedonia was 9.5%. Hence, it was believed that Makedonski Telekom, as a financially stable and relatively large entity for the Macedonian market, should not have a higher cost of debt than the average rate charged by commercial banks to other entities in Macedonia. AEC and Deloitte believe that the cost of debt used in the WACC calculation should be the same as originally proposed and presented as a range from 8.58% to 9.80%. This range is in line with the aforementioned average interest rate in Macedonia.

2.6

Financial Gearing

Makedonski Telekom believes that the WACC calculation based on an efficient gearing does not have a solid theoretical background. Especially, estimation of the efficient gearing based on an average of peer groups is not appropriate, since the selected peer group does not reflect the specific situation of Macedonian operator. Thus, Makedosnski Telekom proposes to apply the market values of debt and equity of the SMP operators in Macedonia for the calculation of the level of financial gearing. A resulting appropriate gearing ratio for the Macedonian fixed line operator would be 8.67%, based on the average capital structure during the last three financial years. In accordance with the main premise that WACC should be calculated on an efficient market operator basis, preliminary draft report determined efficient gearing as the median of the three year average financial gearing for the selected peers. This approach is in line with international practice, since IRG recommends that NRAs should determine the level of gearing that they deem as optimal. In doing so, NRAs could rely on proxies, benchmarks and peer groups. However, the peer group has been slightly adjusted in order to improve the accuracy and reliability of the calculated financial gearing. These adjustments were performed in accordance with the information provided in the section of beta coefficient calculation. Moreover, both calculations are now based on exactly the same sample of peer fixed line operators.

WACC Calculation Comments and Responses to the Public Hearing

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The following table presents the sample used and the calculated efficient financial gearing for a fixed line operator.
Comparable Company BT Group PLC Teo LT Tiscali SpA Telefonica O2 Czech Republic Telekomunikacja Polska SA Magyar Telekom Telecommunica Hellenic Telecommun Organiza Teliasonera AB Telefonica SA Telecom Italia SpA Belgacom SA France Telecom SA Telekom Slovenije Average Median Max Min Ticker BT/A LN TEO1L LH TIS IM SPTT CP TPS PW MTEL HB HTO GA TLSN SS TEF SM TIT IM BELG BB FTE FP TLSG SV Country Britain Lithuania Italy Czech Poland Hungary Greece Sweden Spain Italy Belgium France Slovenia 2006 -2009 average 42.38% 0.47% 52.68% 3.83% 13.52% 30.77% 40.76% 18.96% 38.97% 60.21% 17.96% 42.82% 37.88% 30.86% 37.88% 60.21% 0.47%

The selected financial structure for an efficient fixed line operator in Macedonia consists of 37.88% of debt financing and 62.12% of equity financing. This capital structure was also used, along with statutory corporate income tax rate in Macedonia, in re-levering the un-levered beta coefficient.

WACC Calculation Comments and Responses to the Public Hearing

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3 Comments from T-Mobile Macedonia

3.1

Beta Coefficient

According to T-Mobiles comments, the best approach to estimate the beta coefficient is to use the historical approach by comparing the co-movement between a company and the market. However, since T-Mobile is not listed in the stock market, they propose to estimate the beta based on benchmarks. T-Mobile uses benchmarks presented in the ERG Report from September 2008 and argue that the most suitable benchmark country is Greece and that a fair value for the beta to reflect the systematic risk of the Macedonian market is at least 1.0. On the other hand, T-Mobile argues that the approach presented in preliminary draft report is based on an arbitrary chosen sample, that the number of peer operators (five) is statistically insignificant and that the peer operators selected are not consistent to the peer group for the calculation of the risk free rate. Moreover, the countries for the fixed and the mobile beta calculation are different as well. Furthermore, no rationale is given for the selected peer operators. Most of the peer group operators do not reflect the circumstances of the Macedonian mobile operator. Finally, T-Mobile claims that the level of unlevered beta coefficients from the peer group varies significantly and that they are rather low compared to the results of beta calculations of other regulators. The beta coefficient for mobile operators in Macedonia was calculated by applying the same approach as in the case of fixed line operators. This approach is based on the unlevered beta coefficient from the selected peer group and the capital structure considered as optimal. Further, this procedure is in line with the main premise that WACC should be calculated on an efficient market operator basis. Efficient operator premise is particularly important when the underlying principle of LRIC model is also based on efficient market operator principles. Thus, WACC elements should be calculated on the same principle, without any operator-specific factors considered in the calculation. Benchmark approach proposed by T-Mobile is highly subjective and based on outdated data. The ERG Report that T-Mobile uses in its calculation is from September 2008 and the chart with the summary of beta coefficients from different countries was last updated in January 2008. Also, TMobile did not present any rational for selecting Greece as the most suitable benchmark country.

WACC Calculation Comments and Responses to the Public Hearing

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On the other hand, a peer group presented in the preliminary draft report comprise of mobile operators based on the revenue criteria. The operators from EU were included in the peer group on the basis of the majority of their revenues generated by mobile telephony services. Peer groups used in the calculation of beta coefficients and optimal leverage structures for fixed line and mobile operators, as well as the one used in the risk-free calculation, are all based on EU member countries. There is no inconsistency between the samples used since all the countries represented therein are EU member countries, which is an integrated market, with free flow of capital,. However, AEC and Deloitte acknowledge arguments regarding the structure of the sample used in beta coefficient. Hence, in order to improve the reliability of the calculated beta coefficient, KPN and Swisscom have been excluded from the sample and the following operators: Olisa, Telekom Austria, Portugal Telekom, Sonaecom and Tele 2 have been added. The improved sample now has eight operators that generate majority of their revenues from provisions of mobile telephony services. The new sample and the calculated un-levered beta coefficient are presented in the table that follows.
Comparable Company Portugal Telekom Sonaecom Tele2 AB-B SHS Telenor ASA Vodafone Group PLC Turkcell Iletisim Hizmet AS Elisa Oyj Telekom Austria AG Average Median Max Min Ticker PTC PL SNC PL TEL2B Ss TEL NO VOD LN TCELL TI ELI1V FH TKA AV Country Portugal Portugal Sweden Norway Britain Turkey Finland Austria 3 Years Unlevered Raw Beta Beta 0.898 0.458 1.165 0.860 0.820 0.767 0.594 0.430 0.788 0.491 0.615 0.593 0.667 0.526 0.740 0.466 0.786 0.764 1.165 0.594 0.574 0.508 0.860 0.430

Selected median un-levered beta coefficient for mobile operators is 0.508 and the re-levered beta coefficient is 0.681. The variability of the sample of un-levered beta coefficients for mobile operators, as measured by the standard deviation, is 14.8% (was 11.7% before the adjustments). On the other hand, variability in the sample from the European Regulators Group is 23.3% and 24.6%.

WACC Calculation Comments and Responses to the Public Hearing

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3.2

Financial Gearing

T-Mobile expressed the same arguments regarding the utilization of an efficient gearing as Makedonski Telekom. Namely, they believe that the WACC calculation based on an efficient gearing does not have a solid theoretical background. Especially, estimation of the efficient gearing based on an average of peer groups is not considered appropriate, since the selected peer group does not reflect the specific situation of a Macedonian mobile operator. T-Mobile argues that the gearing ratio for a mobile operator should be based on the gearing ratios of particular mobile operators in Macedonia. Thus, the gearing ratio for T-Mobile should be calculated according to the market value approach using the AD Makedonski Telekom market value. The resulting gearing would be 8.67%. The same approach was applied in determination of financial gearing for fixed line and mobile operators. This approach is based on a median financial structure from a peer group of companies used in the calculation of beta coefficient. This approach is in line with international practice, since IRG recommends that NRAs should determine the level of gearing that they deem as optimal. In doing so, NRAs could rely on proxies, benchmarks and peer groups. The peer group has been slightly adjusted from the one presented in preliminary draft report in order to improve the accuracy and reliability of the calculated financial gearing. This adjustment was in line with the one made in the section for beta calculation. Moreover, both calculations are now based on exactly the same sample of peer mobile operators.
Comparable Company Portugal Telekom Sonaecom Tele2 AB-B SHS Telenor ASA Vodafone Group PLC Turkcell Iletisim Hizmet AS Elisa Oyj Telekom Austria AG Average Median Max Min Ticker PTC PL SNC PL TEL2B Ss TEL NO VOD LN TCELL TI ELI1V FH TKA AV Country Portugal Portugal Sweden Norway Britain Turkey Finland Austria 2006 -2009 average 45.41% 34.24% 10.34% 28.04% 26.86% 4.80% 20.74% 36.45% 25.86% 27.45% 45.41% 4.80%

The selected financial structure for an efficient mobile operator in Macedonia consists of 27.45% of debt financing and 72.55% of equity financing. This capital structure was also used, along with statutory corporate income tax rate in Macedonia, in re-levering the un-levered beta coefficient.

WACC Calculation Comments and Responses to the Public Hearing

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4 WACC for Fixed Line Operators in Macedonia

Based on the comments on initial calculation, presented in the preliminary draft report, of the weighted average cost of capital for fixed line operators in Macedonia provided by Makedonski Telekom and the adjustments made to the initial calculation, the range of WACC values has been recalculated for operators of fixed line telephony with significant market power in the Republic of Macedonia, on the premise of an efficient market operator. The estimated Macedonian fixed line operator WACC as of 30 September 2009 is in a range (rounded) from 13.40% to 14.80%.

Value Lower Risk free rate Beta Coefficient Equity Risk Premium Country Risk Premium Size Risk Premium Nominal Pre- tax Cost of Equity 4.49% 0.729 6.50% 4.19% 1.36% 16.40% Upper 4.49% 0.729 6.50% 4.19% 2.71% 17.91%

Reference Rate Risk Premium Nominal Pre-tax Cost of Debt

8.27% 0.31% 8.58%

4.49% 5.31% 9.80%

Debt to Enterprise Ratio Equity to Enterprise Ratio

37.88% 62.12%

37.88% 62.12%

Corporate Income Tax Rate

10.00%

10.00%

Nominal Pre-Tax WACC (rounded)

13.40%

14.80%

WACC Calculation Comments and Responses to the Public Hearing

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5 WACC for Mobile Operators in Macedonia

Based on the comments on initial calculation, presented in the preliminary draft report, of the weighted average cost of capital for mobile operators in Macedonia provided by T-Mobile and the adjustments made to the initial calculation, the range of WACC values has been recalculated for operators of mobile telephony with significant market power in the Republic of Macedonia, on the premise of an efficient market operator. The estimated Macedonian mobile operator WACC as of 30 September 2009 is in a range (rounded) from 14.00% to 15.40%.

Value Lower Risk free rate Beta Coefficient Equity Risk Premium Country Risk Premium Size Risk Premium Nominal Pre- tax Cost of Equity Reference Rate Risk Premium Nominal Pre-tax Cost of Debt Debt to Enterprise Ratio Equity to Enterprise Ratio Corporate Income Tax Rate Nominal Pre-Tax WACC (rounded) 4.49% 0.681 6.50% 4.19% 1.36% 16.06% 8.27% 0.31% 8.58% 27.45% 72.55% 10.00% 14.00% Upper 4.49% 0.681 6.50% 4.19% 2.71% 17.56% 4.49% 5.31% 9.80% 27.45% 72.55% 10.00% 15.40%

WACC Calculation Comments and Responses to the Public Hearing

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